JNJ - Fate Therapeutics: If You Are Comparing With Geron Do It Thoroughly

2023-03-24 07:13:27 ET

Summary

• Fate Therapeutics' recent Janssen debacle has brought out comparisons with Geron.
• However, let's not forget that Geron has never gone back to pre-2019 prices.
• Fate investors would do well when they rethink their strategy.

Fate Therapeutics ( FATE ) is down 80% since my moderately bearish November coverage as a result of mainly two events - poor preclinical data, and the end of the Janssen ( JNJ ) deal. On December 12, Seeking Alpha announced that Fate hit a "52-week low after preclinical data on leukemia treatment." Whether there is any causal relation between the preclinical data release - which appears to be quite benign - and the reduction in the stock price, cannot be determined. However, that the company stock dropped over 50% after they decided not to continue the renegotiated Janssen deal seems to have been causal, not just concomitant.

The data aims to show how to combine GT Biopharma's ( GTBP ) Tri-specific Killer Engager (TriKE) with Fate's induced pluripotent stem cell (IPSC') product platform to target AML. According to Jeffrey Miller, consulting science chief of GT:

The preclinical data show that dual-antigen targeting strategies combining the two mechanisms "are a promising approach to address the clinical heterogeneity of AML and enhance outcomes for patients with advanced disease."

At that same ASH event, the company presented data from two more programs - from the BCMA-targeted lead program FT576, and from the then-Janssen collaborated preclinical program FT555 targeting GPRC5D. FT576's data looked decent enough considering the heavily pretreated and treatment refractory population until you arrive at the list of adverse events, and these were quite severe. Out of a total of 9 patients :

Two patients experienced Grade 3 or greater FT576-related adverse events (AEs), with one patient having Grade 3 diarrhea and one patient having two episodes of Grades 3 through 4 neutropenia and 3 episodes of Grade 3 anemia, all of which resolved.

Purely by numbers - which admittedly do not make much sense in small populations - almost 20% of patients had grade 3 and 4 adverse events, including neutropenia. If you take that risk into account, the moderate benefit seen in the trial does not seem to amount to much. There were no complete responses, only partial responses and stable disease, which, in absence of a control and a larger patient population, do not indicate anything much. Thus, this is the more likely cause of the 52-week low than the preclinical data.

The other preclinical data presented by the company was for FT555. The data was this:

At ASH, scientists from the companies jointly presented preclinical data demonstrating that single-dose administration of FT555 as monotherapy resulted in robust and durable antigen-mediated tumor regression in two independent disseminated tumor models of aggressive myeloma, which activity was further improved in combination with daratumumab to simultaneously target GPRC5D and CD38 antigens. Administration of three doses of FT555 as monotherapy further improved tumor clearance and showed superior activity compared to single-dose primary CAR T cells.

Janssen opted in for this program only in May 2022, as part of its larger licensing deal with Fate from 2020. Within a few weeks of announcing this data, the two companies parted ways. It appears that Janssen wanted changes in the large, $3bn potential deal and Fate could not agree to the new terms. As Seeking Alpha noted:

Janssen Biotech had presented FATE with a proposal for the continuation of the agreement on revised terms and conditions which FATE declined.

The company drastically reduced its workforce, laying off some 300 people (551-220), and also cutting down its entire NK cell program, including FT516 and FT538 NK cell programs in acute myeloid leukemia, its FT516 and FT596 NK cell programs in B-cell lymphoma, and its FT538 and FT536 NK cell programs in solid tumors. It appears that the company still expects to receive $3mn from Janssen for an IND approval for a first collaboration product for the treatment of B-cell lymphoma, and $10mn for Janssen exercising its second commercial option for a collaboration product. The Janssen departure was, thus, very abrupt, and right in the middle of various payments and program movements.

Looking at the earnings call , things become somewhat clearer:

Given this positive momentum under the Janssen collaboration, we were disappointed to first learn in December that Janssen desired to significantly reduce its 2023 spending under the collaboration as well as modify certain key financial and intellectual property terms of our agreement. Unfortunately, we were not able to align with Janssen for continuation of our collaboration on revised terms. And Janssen exercised its right to terminate the agreement in early January. As a result, all research and development of collaboration candidates are being discontinued and we expect to complete the wind down of the collaboration in early April at Janssen's expense.

We can only assume that what caused Janssen to try to modify the deal must have been data presented at ASH, unless it was something internal to Janssen - like a refocusing effort - and unrelated to Fate. I doubt this was the case, however, because there's no such news that Janssen is reducing activity in NK cell related treatments for cancer. Unsurprisingly, people are citing similarities here with how Janssen ended its collaboration with Geron ( GERN ) on unimpressive data, only to see Geron move on towards better things. Investors are hoping something similar will happen with Fate, because the two companies are similar in some ways. Both have been doing R&D for over a decade now, and when Janssen left Geron, it will sort of in the same doubtful stage as Fate is today.

As is usual in such cases, there were a number of analyst downgrades of the stock. The worst of these was from BofA, where analyst Tazeen Ahmad did a double downgrade to underperform, and also cut the target price to $4 from $72.

Financials

FATE has a market cap of $506mn and a cash balance of approximately $475mn. Thus the market is putting very little value to their programs. Research and development expenses for the fourth quarter increased by $17.7 million to $87.2 million, while General and administrative expenses for the fourth quarter increased by $4.7 million to $21.6 million. Both items will now be significantly reduced, with the NK program gone, along with more than 60% of the workforce. The company says they now have a cash runway of 3 years.

Bottomline

What I said last time still holds, and the recent events have only validated it. Fate has had some good data and some bad ones, and it has cash; however, in 15 years of existence, it just has phase 1 data. Comparisons with Geron come easily, with the implication that Fate will do just as well as Geron did after the Janssen withdrawal. Such a thing is only for fate - and Fate - to decide. Let's not forget also that while Geron has done well recently, it has never reached its pre-2019 prices. Investors in Fate should do well to remember this.

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